The Tory membership which rejected Rishi Sunak for the leadership of the party in favour of the current prime minister, Liz Truss, has cause to regret their choice. Within weeks she has brought the British economy virtually to its knees, forcing Britain’s central bank, the Bank of England, to intervene in panic as the private pension industry was on unprecedented verge of collapse owing to Truss’ spendthrift and unfunded mini-budget. This was her budget and the Old Etonian, Chancellor of the Exchequer, Kwasi Kwarrteng’s role was inconsequential. She carried out the unlikely impetuous promises she had made during the leadership hustings for party leadership and the dire negative consequences predicted by Rishi Sunak during their debates have duly come to pass. Now the UK is facing an economic crisis that will also have serious political consequences, potentially leading to public disorder if statesmanlike measures are not taken by the few thoughtful members who remain in the British parliament.
The Tory membership which voted Liz Truss into power were approximately 40,000 pensioners from southeast England. The inherited toxic prejudices of the cohort of this particular age group could not quite stomach the idea of a non-white person becoming prime minister and wielding supreme authority over the country. Rishi Sunak was the preferred candidate of the Tory parliamentary party, but that did not cut ice with this traditional Tory social class membership and karma is now haunting them. It is they who are the overwhelming beneficiaries of the type of private pension threatened by Liz Truss’s senseless budget.
Rishi Sunak has been widely praised by political and bureaucratic colleagues in government for discreet competence and unobtrusive personal civility. However, his singular disqualification for becoming Britain’s prime minister, in addition to his racial profile, was the conundrum of placing final authority to launch nuclear weapons with an individual who might have divided loyalties if the target happens, for some unknown reason, to be a country in which his relatives live. Liz Truss, in stark contrast to him, has been described by a former Tory ministerial colleague, the thoughtful MP Rory Stewart, as light-weight, apt to utter trite sound bites, but uninterested in serious engagement on issues. Of course she also displayed shameless ambition during the contest for the Tory leadership and lacked substance, but mediocrity is rarely a barrier for transient political glory.
Liz Truss was also the choice of former prime minister Boris Johnson to succeed him and that also influenced his own oversized populist Tory party constituency. He resented Rishi Sunak and colleague, Health Secretary, Sajid Javid, for being the immediate cause that forced him to resign since they precipitated the tsunami of resignations by other ministerial colleagues. Like the crudely populist Boris Johnson, Liz Truss underscores the degeneration of the British political class, insubstantial and without vision, contrasting with the heights of gravitas once symbolised by statesmen like Lloyd George and Winston Churchill.
The mini-budget announced by the Chancellor of the Exchequer on 23 September provoked a run on the pound sterling and an unheard of rout of British long-term gilts which were sold off on a massive scale. The Bank of England intervened because of the danger posed to Britain’s £1.5 trillion slice of the UK’s pensions sector by gilt yields rising rapidly as their price fell. British pension funds, which dominate the market for long-term government debt, also known as gilts, were threatened with default owing to margin calls that relate to their hedging strategies, designed to match income with liabilities. A huge segment of the British middle class, the heart of the Tory Party’s support, would have faced ruin. Yet, the crisis is far from over since the daily £5 billion purchase of gilts, with an additional £60 billion promised if required, is temporary and demands a change in the government’s economic strategy.
Astonishingly, the prime minister sought to brazen it out four days later in interviews, in a bid to save face, by insisting there would be no change in economic policy. She improbably argued the markets had failed to understand the government’s policy package and its long-term benefits but faltered miserably when interviewers asked her to convince markets with credible explanations. In the aftermath of her shocking performance she seemed to undo some of the stability the Bank of England’s intervention had brought to the gilt market. Liz Truss’ political future must be considered uncertain and the economic policies she has attempted to implement are unlikely to survive.
The mini-budget removed the 45 percent tax rate for anyone earning above £150,0000 annually but did little for families trying to maintain a minimally dignified life on incomes around £60,000 and paying 40 percent tax above an annual income of £50,270. They’re overwhelmingly more numerous than annual £150,000 earners and more electorally significant as a result. In addition, cancelling the national insurance surcharge, a form of taxation, announced by Rishi Sunak when he was the Chancellor of the Exchequer, to fund public provision of care for the old, introduces significant long-term haemorrhage of public finances.
These Liz Truss economic policy measures are the source of the additional £70 billion in debt that her government had incurred in one stroke because of the mini budget last week. The government has also put a cap on the unit price of gas and electricity tariffs charged to consumers, estimated to cost the taxpayer anything between £22 billion and £48 billion, depending on the wholesale price of energy in international markets. The unavoidable public subsidy in response to the dramatic rise in the price of energy, which had more than doubled already and was poised to rise even further, has been poorly designed. It could have been targeted towards the neediest rather than made available universally. Prime Minister Truss also unconvincingly rejected the idea of a one-off extraordinary tax on the super profits made by energy retailers on the grounds that it would be a negative signal to investors.
The renewed post-Covid budgetary profligacy of PM Truss and her Chancellor of the Exchequer, in combination with the pre-existing size of public debt and the rise in gilt yields, prompted a run on sterling as well. Its estimated real purchasing power parity level of $1.40 was reduced to nearly parity within 24 hours. The fall in the value in sterling increased inflationary pressures and only raised the price of energy imports, priced in dollars, even further. Her somewhat hysterical claims about the benefits of major tax cuts, despite the economy being severely stressed and output still at a pre-pandemic level, were simply naïve. The adamant insistence that such tax cuts would spur innovation, growth and productivity are merely feeble ideological fixations with little by way of supportive historical precedent.
The idea that tax cuts for the rich would increase their spending and boost economic activity is oblivious to empirical evidence of their greater propensity to save and the higher import coefficient of the goods they purchase, i.e. in imported goods. The London Times has reaffirmed recently the likelihood that higher income earners would bank their additional savings. The spiralling downward trend the mini budget has provoked in the stock market will also produce a wealth effect, only enhancing their propensity to save. In the prevailing British economic situation of low unemployment, it might have been argued instead that the growing upward pressure of wages was more likely to spur innovation and some productivity growth by encouraging greater investment in labour-saving technology.
The overwrought head girl has apparently not taken on board the lessons of Economics 101, which her ideas thoughtlessly ignored. Yet, there was some method in her madness however unwarranted her enthusiasm. There seems to be an undeclared assumption that the billions spent on the costly energy price cap and tax cuts for the wealthy might be partially offset by the £46 billion additional tax revenues owing to the stealth tax of freezing taxation levels on income over the next four years. It is calculated this will result from the unchanged tax levels until 2025-26 of the tax-free first tranche of income at £12,500 and the next tranche of 20 percent tax after £50,270. With inflation already at 10 percent many more will be dragged into higher tax brackets and that will generate increased tax revenues. Higher inflation is also guaranteeing a sharp rise in the cost of borrowing, alarmingly for homeowners, as the Bank of England increases the base rate to meet its inflation targets. However, its purchase of bonds, in response to the threat posed to pension funds by the recent mini-budget, will only increase inflationary pressures. The Bank of England’s actual plan had been to wind down liquidity by reversing quantitative easing in response to growing inflation.
The admittedly flawed government economic strategy was, at best, highly risky because markets rarely look beyond six months. Most pertinently, its assumptions about the medium-term impact of fiscal expansion and tax cuts have not impressed markets. The long-term growth of the economy will also have to rise dramatically to levels not achieved in recent memory to service the substantial public debt accumulated during the Covid period and augmented by thoroughly misguided current economic policies. It has already exceeded 100 percent of GDP and is likely to rise further significantly. The likelihood that the British economy will achieve growth rates of 4 percent and more to service the higher national debt is optimistic.
Britain’s political class is proving incapable of governing the country, unable to balance nostalgic imperial reflexes with its increasingly modest status as a player off the coast of Europe. The commercial cost of Brexit has turned out to be much larger than Boris Johnson and its advocates had suggested, which was the expectation of most economists. The self-delusion of trying to ignore a fundamentally changed global environment and the multiple constraints it poses on medium-sized economies is an exercise in futility. The well-known helplessness of successive British governments in dealing with commands from Washington is also proving hugely costly for the British public, as its unflagging support for the war in the Ukraine is demonstrating. All this will lead to catastrophe for Britain and the rest of Europe too as the energy crisis deepens in the winter, with, possibly, no heating, no lights and no Internet.
Truss has nevertheless all but declared war on Russia, promising £2 billion of additional weapons to the Ukraine that Britain clearly cannot afford. It is a sight to behold how cerebrally challenged ageing military strategists of a bygone era are being marshalled daily, in conjunction with a barefacedly amenable British media, to disseminate the notion of Russia being defeated very shortly in a war it has already won. But the animus against Russia has primordial roots as the one national power that continually besieged the British empire. The only other constant is deep resentment towards an insufferably thriving India, especially under Prime Minister Narendra Modi. It was the loss of the Indian Jewel in the Crown, which a Viceroy to India, Lord Curzon, had contended would reduce Britain to global insignificance. In this context, the authorities have displayed apparent disinclination to stoutly protect Britain’s largely inoffensive Hindu population from recent assault in British cities. Equally predictable has been the indulgence towards jihadi violence and cynical official endorsement of orchestrated media abuse heaped on the alleged extremism of Hindus, improbably imported from Narendra Modi’s India.
The writer taught international political economy for more than two decades at the London School of Economics and Political Science. Views expressed are personal.
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